Earnings Review- What are the Dow components telling us?

One-third of the Dow components released Q2 results this week. This gives us tremendous insight into the economy and investor perception.

The primary term being used by analysts to describe earnings results is “better-than-feared” as market expectations were extremely low.

The outlooks have been conservative and suggest we have further weakness to contend with in the third quarter.

The markets do not seem to mind, perhaps due to the perception that the Fed turned dovish in its Wednesday meeting. The better answer has to do with positioning which is a concept we recently discussed in these pages in our July 21 article.

The following is a breakdown of the Dow component results and the price action in these stocks.

Microsoft (MSFT)

Microsoft ranks 4th in Dow weighting at 5.49% (trails UNH, GS, and HD).

• • A rare bottom-line miss. Revenue growth was 12%, down from the 18-22% range from the prior four quarters.
  • FX headwinds were 4 cents which is in line with what we have seen from multinationals.
  • Its Azure cloud business grew 40% y/y, which outpaced Google cloud’s 36% growth.
  • The stock initially sold off in reaction to the report but was able to turn around on the conference call when the company stated the demand environment remained strong.
  • The stock is breaking out above resistance at the $270 area. Holding above this level will be important.

McDonalds (MCD)

McDonalds is the 5^th heaviest weighted component at 5.29%.

• • Beat by 8 cents but missed on revenue which fell 2.9% y/y.
  • Same-store sales were impressive, rising 9.7% on top of comps of +40% in the prior year period.
  • MCD highlighted the difficult environment as it stated inflation was having an impact on consumer behavior.
  • Deutsche Bank downgraded the stock to Hold from Buy as the firm believes inflationary pressures will limit further upside potential in the shares.
  • Shares of MCD are breaking out above the $258 area following the report as markets are on the rise.

Visa (V)

Visa ranks 7^th in the Dow with a weighting of 4.30%

• • Credit Card companies remain a key outperformer.
  • V beat by 23 cents on the bottom line. Revenue growth of 18.7% outpaced expectations.
  • Total processed transactions were up 16% y/y.
  • The company said that it has not seen any slow down in consumer spending.
  • The stock is seeing a “sell-the-news” reaction as it dips back below its 200-sma ($211). This suggests investors believe CC companies may have hit a peak in spending.

Honeywell (HON)

Honeywell is the 9^th heaviest weighting in the Dow at 3.75%.

• • Beat by 7 cents. Revenues increased 1.9% y/y to outpace expectations of a small decline.
  • Organic revenue grew 4% y/y.
  • The company narrowed its FY22 outlook by primarily raising the low end of guidance. This is encouraging for investors.
  • “While we recognize macro crosscurrents are clouding the global economic growth outlook, we remain confident in our demand outlook for the back half of the year with orders up 12% year over year and closing backlog2 of $29.5 billion, up 12% year over year, led by our long-cycle businesses, which will help drive growth for quarters to come”.
  • The stock jumped above its 50-sma in reaction to the news. It will see significant resistance in the $194-197 area so we would not want to chase this move.

Boeing (BA)

Boeing is the 14^th heaviest weighted component at 3.19%.

• • BA missed by 27 cents and missed on the top line as revenue fell 1.9% y/y.
  • The top and bottom-line misses were overshadowed by the fact that the company posted positive operating cash flow as well as positive free cash flow.
  • Investors were able to push through the Q2 results as the company announced a slew of new contracts at last week’s Farnborough Air Show.
  • The company said it is on the verge of returning to make deliveries of its 787 and it’s 737 MAX continues to do well.
  • BA said that it remains on track to be cash flow positive in 2022.
  • Shares of BA have traded in a tight range since the report. A hold above the $140-150 area will encourage investors to move off the sidelines and buy into this cheap name.

3M (MMM)

3M ranks 18^th in the Dow with a weighting of 2.84%.

• • MMM beat by four cents and reported revenues in line with expectations.
  • MMM did lower its Fiscal Year 2022 outlook as rising costs of goods sold impact margins. MMM lowered its revenue outlook to (2.5%)-(0.5%) compared to the prior outlook of +1-4%.
  • The company announced a settlement with regards to its Aearo Technologies unit. While the $1.2 billion price tag is concerning, investors will be happy to have the uncertainty in the rearview
  • MMM also announced the divestiture of its Healthcare unit.
  • The results were not great but the stock rallied on the legal settlement news. Shares are fighting to hold above the 50-day moving average ($137).
  • We believe there are better places to park your money.

Wal-Mart (WMT)

Walmart is the 20^th heaviest weighted stock in the Dow at 2.59%.

• • WMT did not report earnings but it did surprise markets by providing an early warning on its upcoming second-quarter earnings report expected in late August.
  • WMT lowered its Q2 and FY22 EPS expectations below consensus. However, it did raise its revenue outlook.
  • The primary drag was that WMT needed to increase its promotional environment around apparel. Basically, it is cutting prices on its clothing in order to get products out the door ahead of the Back-to-School and Holiday seasons.
  • WMT noted that inflationary pressures, primarily around food, were changing consumer behavior. This led to a negative product mix that was a drag on the bottom line (Food is a lower-margin business).
  • WMT did say that it is taking market share which explains the higher revenue outlook.
  • Shares of WMT were smacked down 8% in reaction to the news but they firmly held support around $120. WMT has now recovered its losses as it trades back to the $130 area.
  • This is going to lower expectations in the retail space. We saw Best Buy (BBY) follow suit with a warning on Thursday morning. We would expect to see further warnings from this space ahead of its earnings season.

Coca-Cola (KO)

KO ranks 25^th with a weighting of 1.28%.

• • KO beat by 3 cents on the bottom line and beat on revenues as growth hit 11.9%.
  • The EPS outlook was in line. KO’s organic revenue growth of 12-13% was higher than expectations. That includes a 6% FX headwind.
  • This news follows up an impressive round of earnings last week from peer PepsiCo (PEP). The key takeaway is that consumers are not giving up their snacks in this environment.
  • Shares of KO are reacting positively to the strong report. The stock is rallying into a key test of resistance at the $65 area which marks the June highs.

Other still to report:

Apple (13^th, reports Thursday night)… Chevron Corp (16^th, reports Friday morning)… Proctor & Gamble (Ranks 17, reports Friday morning).